For example, assume Sophia wants to earn a return of 5.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 5.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bonds intrinsic value:

Intrinsic Value

=

A/(1 + C)^1+A/(1 + C)^2+A/(1 + C)^3+A/(1 + C)^4+A/(1 + C)^5+A/(1 + C)^6+B/(1 + C)^6

Complete the following table by identifying the appropriate corresponding variables used in the equation.

Unknown	Variable Name	Variable Value
A	Bonds semiannual coupon payment	$37.50
B	Bonds par value	$1,000
C	Semiannual required return	4.3750%

Based on this equation and the data, it is ____________(unreasonable or reasonable) to expect that Sophias potential bond investment is currently exhibiting an intrinsic value equal to $1,000.

Now, consider the situation in which Sophia wants to earn a return of 2.00%, but the bond being considered for purchase offers a coupon rate of 5.00%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bonds intrinsic value to the nearest whole dollar, then its intrinsic value of (rounded to the nearest whole dollar) is its par value, so that the bond is .

Given your computation and conclusions, which of the following statements is true?

___When the coupon rate is greater than Sophias required return, the bonds intrinsic value will be less than its par value.

___When the coupon rate is greater than Sophias required return, the bond should trade at a premium.

___A bond should trade at par when the coupon rate is greater than Sophias required return.

___When the coupon rate is greater than Sophias required return, the bond should trade at a discount.

What will happen to the price of a fixed-rate bond when expectations for inflation rise?

___The bond price will fall.

___The bond price will rise.